Out: The ability to recover success fees in conditional fee agreements and premiums for after the event insurance.

In: Damages-based agreements (otherwise known as contingency fees).

These are the headlines from Lord Justice Jackson's review of civil litigation costs that will have the most bearing on the funding of commercial litigation claims from April 2013.

Organisations with a potential or existing claim should consider now whether to proceed on the favourable funding terms that a conditional fee agreement, combined with an after the event insurance policy, can provide in their current format.

The ins and outs of funding civil litigation costs

What's out?

It's currently expected that on 1 April 2013, the new funding regime for civil litigation will come into force in line with Lord Justice Jackson's proposals and as enacted in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPOA). Published in January 2010, Jackson's report made a number of recommendations to address the unease felt at the high costs of civil litigation, as discussed in our alert at the time. How these would be put into practice became clearer in the Government's response in March 2011, covered in our alert announcing 'Reform is on the way'.

The purpose of conditional fee agreements (CFAs) and after the event (ATE) insurance was to ensure access to justice. Indeed, the use of such funding mechanisms has enabled many personal injury claims (and other consumer claims) to be litigated 'costs free' by claimants. They have also allowed a large number of commercial claims to be litigated at a much reduced cost exposure. For more on how CFAs and ATE insurance work in practice, read the section on 'Funding litigation - can you cut the costs?' in our 'Before you take the plunge' alert series.

However, Lord Justice Jackson's view is that the advent of CFAs and ATE insurance encouraged "have a go" litigation and brought about spiralling costs in civil litigation claims (particularly in the NHS, which is why the Government is changing the rules).

Under the reforms, the ability for a lawyer and their client to enter into a CFA and for claims to be backed by ATE insurance will remain. However, from 1 April the implementation of LASPOA will bring an end to the recoverability of both the success fee in CFAs and the premium for ATE insurance from the losing party (save in very limited circumstances). Instead, the success fee and the premium will be payable by the client itself which makes those arrangements much less desirable.

What's in?

While the final details are not yet clear, we do know that LASPOA will permit damages-based agreements (DBAs) for the first time in all cases in which CFAs can currently be entered into. Also known as contingency fees, DBAs are currently only permissible in non-contentious matters and employment tribunal cases.

Under a DBA, the lawyer's fee will be an agreed percentage of the client's recovered damages, rather than based on an hourly rate which is the position where a CFA has been entered into. According to the currently available draft documentation and recommendations by the Civil Justice Council's working party, it would appear that:

  • DBAs will be allowed in three types of civil disputes: employment, personal injury and commercial.
  • There will be a cap on the amount of damages that can be taken by way of the DBA fee. This will be 35 percent in employment cases (as is currently the position), 25 percent in personal injury cases (which will also be the limit for CFAs in personal injury cases) and 50 percent in all other commercial cases, whether involving individuals or corporations.
  • The model to be adopted will be that used in Ontario, Canada. This model provides that the successful funded party can recover its base costs (i.e. the lawyer's hourly rate and disbursements) from the losing party on the current conventional basis. Where the fee agreed under the DBA exceeds those base costs, the client will pay the difference between those two figures out of its damages.

In practice, the DBA should work along the following lines: a case settles and the claimant recovers £100,000 damages with recoverable costs to be paid by the losing defendant assessed at £20,000. If the DBA fee is 25 percent of the damages recovered, the claimant's lawyer's fee will be £25,000. The lawyer retains the £20,000 recovered costs and sets them off against the DBA fee, with the remaining balance of £5,000 being paid by the claimant from the damages. The claimant keeps the £95,000 balance of the damages.

  • The Ministry of Justice has confirmed that the indemnity principle will continue to apply so a party may not recover, by way of costs, more than the total amount payable by that party under the DBA.
  • As noted above, payment of the DBA fee is out of damages "recovered", not simply damages awarded. If the losing party turns out to be a "man of straw" and no damages, or costs, are recovered, the lawyer will not recover its DBA fee. Hence the need for rigorous solvency checks at the outset.
  • It is proposed that lawyers acting under DBAs should not be liable for adverse costs if the claim is lost simply because they are acting under a DBA. It is therefore envisaged that the position concerning adverse costs will be the same as that where a CFA has been entered into i.e. the losing party, not their lawyer, has to pay those costs. This is so even if the lawyer also agrees to pay the funded party's disbursements.
  • Third party funders who provide commercial funding on a DBA basis should, however, be responsible for limited adverse costs under the same principle as they are currently liable for such costs. At present, third party funders are liable for adverse costs equal to the amount with which they fund the litigation i.e. if they have funded £1 million of costs, they will be liable for £1 million of adverse costs if the claim is lost. This position will remain unchanged.
  • As there is no ability to recover any element of the DBA fee from an opponent, there should be no obligation to notify opposing parties that a DBA has been entered into.  

The final detail of how DBAs will work in practice (for non-employment claims) will be provided by way of a Statutory Instrument and changes to the Civil Procedure Rules. We understand these are not due to be published until mid January 2013, making timing very tight given their 1 April 2013 implementation date.

In the meantime - act before it's too late

LASPOA makes it clear that the changes to the recoverability of both the success fee and the premium payable for an ATE insurance policy will not be retrospective. So where a CFA has been entered into by a party or an ATE insurance policy has been obtained prior to 1 April 2013, they should be recoverable from the losing party - provided the correct notice has been given and the success fee and/or the premium is reasonable. This will remain the position even though the claim does not come to a conclusion until after April 2013.

Parties with the benefit of a CFA and ATE insurance under the current regime have a real advantage in terms of their overall protection from liability for legal costs. That advantage will be lost when these reforms come into effect. We would, therefore, highly recommend considering these arrangements prior to April 2013 for any claims which you might have.